DUDE WTF UMM… – Currency Issuers and Users

Welcome to the very first (and possibly last) “Don’t Understand, Don’t Even Want To F___ing Understand Modern Money” post, otherwise known as a DUDE WTF UMM… post. This is for those of us who have no desire to consider economics at even an elementary level but who are tired of others exploiting our indifference and blasé attitude for their own dubious ends. Just because we don’t know diddly-squat about economics and are proud of it, this should not disadvantage us in life. What we need are some easy ways to spot when we are being led astray, without too many boring details.

 
An Imaginary 2-Person Beach Economy

(Note to self: “Economy”? Careful. Already getting bored.)

We sit on the balcony of a beachside café. You propose a game. It’s a game of imagining a simple economy.

There are only two of us in this imaginary economy, and we live on the beach. You insist on being government. That makes me non-government.

In our imaginations, we meander down to the shore.

For a time all seems peaceful, until, while building a sand castle, I hear the words, “I’m sick of this crap.”

I turn to see … you … flipping through a stack of business cards. You say, “We’ve been lazing around this beach for days now, and our highest achievement is this sand castle.”

“What do you expect?” I ask. “We’re surrounded by sand.” I sit back and observe the sand castle, admiring its contours.

“Something’s gotta give. It’s time we introduced a currency into the equation and got down to business.” You hold up your pack of cards for me to see. “From now on, you have to pay me ten of these business cards each week.”

Blank stare. “I don’t have any of those.”

“Well, I want you to pay me in them.”

Blank stare turns into a glare. “It’s impossible,” I say. “I don’t have any of the damn things.”

“I won’t take no for an answer.”

An impasse.

You wander off to do whatever it is you do.

At the end of the week, you return to the beach, the sun blazing, and demand the ten business cards you insist I owe you.

I stamp my foot in the sand. “How am I meant to pay you your dumb business cards when there is nowhere I can get them? You are the stupidest government in the history of the world! I’m sick of this game.”

You are unmoved.

“Why do you need them anyway?”

“Never mind that. Pay up, or I’ll kick your sand castle down.”

“I’ll kick it down myself.”

“I’ll kick you down.”

“No, I’ll kick you down.”

There is a scuffle in the sand.

You break away, having had an epiphany. “I know! How about I pay you ten of my business cards each week to do stuff. You can start by building a hut. Then you’ll have some business cards to pay me as taxes.”

I brush sand from myself. “So you’re going to give me your business cards so that I can give them back to you? You really are a special kind of idiot. What would either of us get out of that?”

“A hut,” you announce in triumph.

“A hut?”

“Yes, a hut. Soon it will be getting chilly at night and, already, the high tide is threatening to flood our cave. And a hut’s just for starters.”

The arrangement seems rather one-sided. “What are you going to do?”

“I’ll make sure the surfers don’t steal your building materials, keep the books in order and resolve administrative difficulties as they arise. I’ll also do some preliminary research on huts to inform your construction efforts.”

“How are you going to afford my wages. I haven’t even paid any taxes yet. You’ll go broke! You really are the most irresponsible government ever!”

There is silence.

Slowly our eyes fall on the pack of business cards, which you are still holding.

For reasons unclear to me your face lights up. You speak in excited tones. “Don’t you see? I already have the business cards.” You hold the cards aloft.

I am stunned. “Where did those come from?”

You paddle the question away with ease. “They’re my business cards. I can get as many of them as I want. At work. In my real job.”

But we seem to be going round in circles.

“So why do you need me to pay you in business cards, again? You already can get as many as you want. It’s ridiculous.”

“It’s not about me needing business cards. It’s about getting our economy up and running instead of spending all our time lazing around building sand castles.”

“You mean, because I’m forced to earn your lousy business cards, I have to build huts for us to sleep in during the winter months, when I could be building sand castles?”

“Exactly. I don’t need the business cards. But you do. And to get them, you will agree to do useful stuff.”

The cheek! “Screw that,” I say. “I’m lazing around in the sun building sand castles. It’s more enjoyable.”

“But then you’ll die in the winter months. Or, considering this is Sydney, where the winters are only mild, you will at least get a little chilly.”

“No I won’t.” I slam a mug onto the table of the beachside café, lurching back to reality. “This is just pretend. I can stop playing any time I want.”

“Well, I guess. If you put it like that.” You bite into a croissant, momentarily silenced. “But what if the game happened to be real, and you needed to pay taxes in business cards, and the only way you could get the business cards was as payment for doing useful stuff.”

“I suppose I’d build a hut,” I concede with a grimace. “To keep you off my case.”

 
The Real World

(Second note to self: “Real world”? OMG. Now I’m really bored!)

It is the same in the real world. The government imposes taxes that are settled only in its currency. This means we need the currency and are willing to accept it in payment for stuff. The government is then able to spend its currency into the economy and we are able to pay our taxes.

We can also use the currency for other purposes, such as buying and selling, or saving. But we can get to that another time. Maybe. If we can be bothered.

In any event, the next time a politician claims,”The government has run out of money,” we can call BS!

 
Related Reading

Bill Mitchell – A Simple Business Card Economy

Randall Wray – Taxes Drive Money

Geoff Coventry – Myth 1: The purpose of taxes is to raise funds for government spending

Geoff Coventry – SHORT VIDEO: The Basics of Modern Money

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4 thoughts on “DUDE WTF UMM… – Currency Issuers and Users

  1. Excellent explainer for a monopoly issuer of the currency, Peter.

    In real life banks would create business cards out of thin air, then collect interest on the business cards and eventually end up owning most of the huts while the other beach-ites perform slave labor. Government would be bribed to go along with this racket and even act as the banks’ protectors and enforcers. We can only hope that someday the beach wage slaves figure out how to build a guillotine.

  2. As long as we are talking simple models, this arrangement would potentially maximize everyone’s benefit if the model is expanded to assume many banks, many producers, and consumers, along with homogenous agency, perfect information and perfect competition in all markets. This would the free banking aspect of the Libertarian-Austrian model that Rothbard takes to the extreme by assuming only private property. What is ignored is the real world cultural and institutional background that is also historical that makes such models simplistic in addition to simple.

  3. If my memory from my studies of early feudal times serves me correctly, taxes were initially paid in actual ‘produce’ by the serfs to the lords whose job it was to defend the country, with the use of tally sticks being used as proof of payment..eventually the King realized that it could pre-purchase produce for the armies instead of waiting until tax time (hence began govt spending) and it would use tally sticks to spend which also carried with it a promise to accept them back in payment of taxes

  4. Good comments, everyone.

    I know you will all be aware of this, but for the benefit of newer readers, the story is basically Warren Mosler and Bill Mitchell’s simple analogy to get across, first and foremost, that taxes drive demand for the currency and that the currency must be issued before taxes in it can be paid. These concepts can be conveyed with just the two characters, one representing government and the other non-government

    Two characters are also enough to illustrate how the government balance must mirror the non-government balance (not discussed in the present post). Bill Mitchell’s post linked to at the end explains this point. He also provided two follow-up posts:

    Barnaby, better to walk before we run

    Some neighbours arrive

    Other stuff, such as exchange in the domestic private sector, trade with an external sector or a banking system, can be illustrated by introducing additional characters into the story.

    For instance, the danger of rentiers taking over (Dan’s observation) is illustrated in an earlier (long but simple) post:

    Parable of a Monetary Economy

    A briefer discussion of the business card analogy is provided in:

    MMT in Simple Parables

    I know the repetition, from time to time, of basic MMT concepts must get tedious for long-time readers. But attempting to communicate these elementary points in hopefully accessible ways remains one of the main priorities of the blog. So these posts will continue to appear into the future.

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